Borrowers with bad credit can still consolidate debt


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Ask a Lender
March 31, 2017 | Updated September 22, 2017


Key Points

Debt consolidation considerations

  • Borrowers with a good credit rating have plenty of options for consolidating debt.
  • Conventional lenders tend to reject borrowers with weak credit, but alternative lenders can be an option.
  • Avoid scams or committing to high-interest loans that cost more than the original credit card balances.
  • Debt consolidation can be a good strategy if done in conjunction with a plan to lower overall debt.

Many consumers run up debts on numerous credit cards. If you are not careful, it can be easy to get behind or toss bills into a drawer and try to forget about them. But late payments will catch up to you and make it harder to get out of debt.  

With so many high-interest debts, some people eventually get themselves in over their heads, or find it almost impossible to lower their balances. They may default, which is one of the fastest ways to destroy your credit rating.

If you have good credit and want to consolidate your debts, chances are you will have a lot of options for rolling that debt into one place. Banks, credit unions, nontraditional lenders and credit card companies all offer varying types of debt consolidation loans.

Homeowners with good credit ratings also can often tap into the value of their homes through a second mortgage or a home equity line of credit (HELOC) to pay off high-interest credit cards.

So, the bottom line is that a person with a good credit rating  can usually find a loan or financing offer that makes sense to help take control of their finances and lower their debt burden. If you have good credit and a home, there are plenty of ways to convert adjustable, high-interest credit cards debts into lower-interest fixed-rate loans.

Debt consolidation with bad credit

For people with poor credit, however, loan consolidation is much harder. Traditional banks and credit unions tend to reject people with weak credit. Lenders also are reluctant to offer home-equity loans and lines of credit to people with low credit scores.

Lenders do tend to feel more comfortable when a personal loan is secured by property, however. So, a person with lower credit may find it easier to get a secured personal loan, which is backed by their home or some piece of property with enough equity to minimize the risk to the lender of the borrower defaulting.

A number of alternative lenders offer debt consolidation loans, but borrowers should be cautious. First, internet scammers often target borrowers with weak credit profiles. One red flag, for example, is if a lender request an upfront fee to process the application for a “low-interest-rate loan” before the loan is approved. This is a clue that the company is not legitimate, and merely trying to extract fees from a vulnerable borrower.

If you have a bad credit rating, however, chances are that you will have to pay more for a loan. Lenders view people who have maxed out numerous credit cards as being riskier, and higher risk almost always leads to higher interest rates. The interest rate on these personal loans even could be higher than on the credit cards being paid off.

When other fees are tacked on, the debt-consolidation loan could be much more costly to the borrower in the long run than if that person had simply worked to pay down the credit card balances. That is why it is important that you do the math to determine if the loan is saving you any money.

Using debt consolidation wisely

Another important thing to note about debt-consolidation loans is that the debt is still there. Borrowers often rush to consolidate their debts, but do not have a plan to reduce their overall debt. Some borrowers wipe clean their credit card balances and then go out and rack up more charges on a spending spree. They have now added to their overall debt and dug an even deeper hole to climb out from.

A debt consolidation loan can, however, be a useful tool in managing your finances, if it is done in conjunction with budgeting and a commitment to getting out of debt.


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